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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
  
 FORM 10-Q  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2004.
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM  TO
 Commission file number: 0-22187 RENAISSANCE LEARNING, INC.  Wisconsin
(State or other
jurisdiction of incorporation)
    
    39-1559474
(I.R.S. Employer
Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
(Address of principal executive offices) 54495-8036
(Zip Code) (715) 424-3636
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Class
    
    Outstanding at
April 30, 2004Common Stock, $0.01 par value
    
    31,057,356




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RENAISSANCE LEARNING, INC. INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 PART I   FINANCIAL INFORMATION PageItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2004
and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    7Item 3.
    
    Quantitative and Qualitative Disclosures About
Market Risk
    
    
    10Item 4.
    
    Controls and Procedures
    
    
    11PART II  OTHER INFORMATIONItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
    
    
    12Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    12CertificationCertificationCertificationCertification
  - Index -




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) March 31, 2004
    
    December 31, 2003(In Thousands, Except Share andPer Share Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,349
    
    
    $
    62,524Investment securities
    
    
    36,889
    
    
    
    42,825Accounts receivable, less allowances of $1,539 and $1,629, respectively
    
    
    12,301
    
    
    
    13,182Inventories
    
    
    2,686
    
    
    
    2,354Prepaid expenses
    
    
    1,203
    
    
    
    1,352Deferred tax asset
    
    
    4,083
    
    
    
    3,743Other current assets
    
    
    831
    
    
    
    889Total current assets
    
    
    71,342
    
    
    
    126,869Investment securities
    
    
    3,746
    
    
    
    6,485Property, plant and equipment, net
    
    
    20,183
    
    
    
    20,536Deferred tax asset
    
    
    1,786
    
    
    
    1,795Goodwill
    
    
    2,642
    
    
    
    2,642Other intangibles, net
    
    
    404
    
    
    
    478Capitalized software, net
    
    
    599
    
    
    
    626Total assets
    
    $
    100,702
    
    
    $
    159,431LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,754
    
    
    $
    3,144Deferred revenue
    
    
    10,746
    
    
    
    10,705Payroll and employee benefits
    
    
    2,611
    
    
    
    3,153Income taxes payable
    
    
    3,636
    
    
    
    2,295Other current liabilities
    
    
    4,215
    
    
    
    4,869Total current liabilities
    
    
    24,962
    
    
    
    24,166Deferred revenue
    
    
    681
    
    
    
    800Deferred compensation
    
    
    1,084
    
    
    
    958Total liabilities
    
    
    26,727
    
    
    
    25,924Minority interest
    
    
    147
    
    
    
    177Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at Dec. 31, 2003 and March 31, 2004
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    54,001
    
    
    
    54,167Retained earnings
    
    
    86,661
    
    
    
    148,596Treasury stock, at cost 3,718,073 shares March 31, 2004;
3,860,802 shares Dec. 31, 2003
    
    
    (67,256
    )
    
    
    (69,838
    )Accumulated other comprehensive income
    
    
    75
    
    
    
    58Total shareholders equity
    
    
    73,828
    
    
    
    133,330Total liabilities and shareholders equity
    
    $
    100,702
    
    
    $
    159,431
 See accompanying notes to condensed consolidated financial statements. -1-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited) For the Three Months EndedMarch 31,2004
    
    2003(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    25,085
    
    
    $
    27,190Services
    
    
    6,448
    
    
    
    7,036Total net sales
    
    
    31,533
    
    
    
    34,226Cost of sales:Products
    
    
    1,790
    
    
    
    3,169Services
    
    
    3,746
    
    
    
    3,356Total cost of sales
    
    
    5,536
    
    
    
    6,525Gross profit
    
    
    25,997
    
    
    
    27,701Operating expenses:Product development
    
    
    4,203
    
    
    
    4,463Selling and marketing
    
    
    9,350
    
    
    
    8,102General and administrative
    
    
    3,398
    
    
    
    3,463Total operating expenses
    
    
    16,951
    
    
    
    16,028Operating income
    
    
    9,046
    
    
    
    11,673Other income:Interest income
    
    
    311
    
    
    
    555Other, net
    
    
    75
    
    
    
    177Income before taxes
    
    
    9,432
    
    
    
    12,405Income tax provision
    
    
    3,490
    
    
    
    4,745Net income
    
    $
    5,942
    
    
    $
    7,660Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.24Diluted
    
    $
    0.19
    
    
    $
    0.24Cash dividends declared per share
    
    $
    2.19
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements. -2-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) For the Three Months EndedMarch 31,2004
    
    2003(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    5,942
    
    
    $
    7,660Noncash (income) expenses included in net income -Depreciation and amortization
    
    
    934
    
    
    
    1,099Amortization of investment discounts/premiums
    
    
    246
    
    
    
    500Deferred income taxes
    
    
    (331
    )
    
    
    (86
    )Change in assets and liabilities -Accounts receivable
    
    
    881
    
    
    
    1,888Inventories
    
    
    (332
    )
    
    
    2Prepaid expenses
    
    
    149
    
    
    
    202Accounts payable and other current liabilities
    
    
    881
    
    
    
    366Deferred revenue
    
    
    (78
    )
    
    
    (1,086
    )Other current assets
    
    
    58
    
    
    
    75Other
    
    
    30
    
    
    
    2Net cash provided by operating activities
    
    
    8,380
    
    
    
    10,622Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (350
    )
    
    
    (1,637
    )Purchase of investment securities
    
    
    (4,031
    )
    
    
    (14,208
    )Maturities/sales of investment securities
    
    
    12,460
    
    
    
    19,805Capitalized software development costs
    
    
    (119
    )
    
    
    (69
    )Net cash provided by investing activities
    
    
    7,960
    
    
    
    3,891Cash flows from financing activities:Return of capital to minority interest
    
    
    (54
    )
    
    
    Proceeds from issuance of stock
    
    
    
    
    
    
    1,047Proceeds from exercise of stock options
    
    
    2,416
    
    
    
    105Dividends paid
    
    
    (67,877
    )
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (15,190
    )Net cash used by financing activities
    
    
    (65,515
    )
    
    
    (14,038
    )Net (decrease) increase in cash
    
    
    (49,175
    )
    
    
    475Cash and cash equivalents, beginning of period
    
    
    62,524
    
    
    
    18,220Cash and cash equivalents, end of period
    
    $
    13,349
    
    
    $
    18,695
 See accompanying notes to condensed consolidated financial statements. -3-




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 1. Consolidation The condensed consolidated financial statements include the financial
results of Renaissance Learning, Inc. and our subsidiaries. Our significant
subsidiaries include Renaissance Corporate Services, Inc. and Generation21
Learning Systems, LLC. All significant intercompany transactions have been
eliminated in the condensed consolidated financial statements. 2. Basis of Presentation The condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in our opinion,
necessary for a fair presentation of the results of the interim periods, and
are presented on an unaudited basis. These financial statements should be read
in conjunction with the financial information contained in our Annual Report on
Form 10-K for the year ended December 31, 2003, which is on file with the U.S.
Securities and Exchange Commission (2003 Annual Report). The results of operations for the three-month periods ended March 31, 2004
and 2003 are not necessarily indicative of the results to be expected for the
full year. 3. Earnings Per Common Share Basic earnings per common share is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Shares issued and shares reacquired during the
period are weighted for the portion of the period they were outstanding.
Diluted earnings per common share has been computed based on the weighted
average number of common shares outstanding, increased by the number of
additional common shares that would have been outstanding if the potentially
dilutive stock option shares had been issued. On April 17, 2002, our Board of Directors authorized a repurchase program
which provides for the repurchase of up to 5,000,000 shares of our common
stock. No time limit was placed on the duration of the repurchase program, nor
is there any dollar limit on the program. Repurchased shares will become
treasury shares and will be used for stock-based employee benefit plans and for
other general corporate purposes. During the quarter ending March 31, 2004, we
did not repurchase any shares under this program. The cumulative shares
repurchased under this program remain at 4.0 million with an associated cost of
$72.9 million. The weighted average shares outstanding are as follows: Three Months Ended March 312004
    
    2003Basic weighted average shares outstanding
    
    
    30,963,565
    
    
    
    31,655,298Dilutive effect of outstanding stock options
    
    
    270,829
    
    
    
    112,282Diluted weighted average shares outstanding
    
    
    31,234,394
    
    
    
    31,767,580
 For the three months ended March 31, 2004 and 2003, 667,500 and 979,872
shares attributable to outstanding stock options were excluded from the
calculation of diluted earnings per share because the effect was antidilutive.
These options could be dilutive in the future. 4. Comprehensive Income Total comprehensive income was $6.0 million and $7.6 million in the first
quarter of 2004 and 2003, respectively. Our comprehensive income includes
foreign currency translation adjustments. -4-




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5. Goodwill and Other Intangible Assets In accordance with SFAS No. 142 Goodwill and Other Intangible Assets,
goodwill is not amortized but is tested at least annually for impairment. Our
other intangible assets have finite lives and are amortized over their
estimated useful lives of four years for algorithms and purchased software
code, and five years for the non-compete agreement. Other intangibles with
finite lives are scheduled to be fully amortized in 2005 with corresponding
amortization estimated to be $212,000, for the remainder of 2004, and $192,000
for 2005. For the three months ended March 31, 2004 and 2003, we recognized amortization
expense on other intangibles of $74,000 and $134,000, respectively. No
goodwill or other intangibles were acquired or impaired during the first
quarter of 2004 or 2003. Other intangibles consisted of the following (in
thousands): March 31, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    Other
    
    Gross
    
    
    
    
    
    OtherCarrying
    
    Accumulated
    
    Intangibles
    
    Carrying
    
    Accumulated
    
    IntangiblesAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetAlgorithms and software code
    
    $
    2,124
    
    
    $
    2,077
    
    
    $
    47
    
    
    $
    2,124
    
    
    $
    2,058
    
    
    $
    66Non-compete agreement
    
    
    1,100
    
    
    
    743
    
    
    
    357
    
    
    
    1,100
    
    
    
    688
    
    
    
    412Other intangibles
    
    $
    3,224
    
    
    $
    2,820
    
    
    $
    404
    
    
    $
    3,224
    
    
    $
    2,746
    
    
    $
    478
 6. Stock Option Plan We have established the 1997 Stock Incentive Plan for our officers, key
employees, non-employee directors and consultants. The intrinsic value method
as prescribed in APB 25, Accounting for Stock Issued to Employees, is used to
account for stock based compensation arrangements. Had compensation cost been
determined for our plan based on the fair value at the grant dates for awards
consistent with the alternative method set forth under SFAS 123, our net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below: For the Three Months EndedMarch 31,2004
    
    2003(In thousands, except per share amounts)Net Income, as reported
    
    $
    5,942
    
    
    $
    7,660Deduct: total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    595
    
    
    
    917Pro forma net income
    
    $
    5,347
    
    
    $
    6,743Earnings per share:Basic as reported
    
    $
    0.19
    
    
    $
    0.24Basic pro forma
    
    $
    0.17
    
    
    $
    0.21Diluted as reported
    
    $
    0.19
    
    
    $
    0.24Diluted pro forma
    
    $
    0.17
    
    
    $
    0.21
 The fair value of options granted in the first quarter of 2004 and 2003
were estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions: Three MonthsEnded March 31,2004
    
    2003Dividend yield
    
    
    0.64
    %
    
    
    0.00
    %Expected volatility
    
    
    65
    %
    
    
    77
    %Risk-free interest rate
    
    
    3.24
    %
    
    
    2.97
    %Expected life (in years)
    
    
    6
    
    
    
    6
 -5-




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7. Segment Reporting Beginning in 2004, our results are presented as one operating segment. We
had previously reported two operating segments: (i) software and (ii) training.
We are no longer organized by these segments and we now manage our operations
as one business. These changes were made to better support our customers
needs through offerings of bundled solutions which consist of software,
professional development, implementation assistance, technical consulting, and
ongoing maintenance and support plans. Accordingly, we do not produce discrete
financial information or make resource allocation decisions for separately
reportable segments as defined by SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. Foreign market operations are not
significant at this time. 8. Dividends On March 1, 2004, we paid a special cash dividend of $2.15 per share and
our first quarterly dividend of $.04 per share totaling $67.9 million. On April 21, 2004, our Board of Directors declared a quarterly cash
dividend of $.04 per share, payable June 1, 2004 to shareholders of record as
of May 14, 2004. -6-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Our results of operations can be affected by general economic factors and
their related impact on state and federal budgetary decisions. The difficult
funding environment existing in the 2003-2004 school year continued to impact
the first quarter of 2004 including reduced attendance at our National
Conference. Another contributing factor was the delay in customer order
decisions as they evaluate our new Renaissance Place product line. The following table sets forth certain consolidated income statement data in
dollars and as a percentage of net sales, except that individual components of
costs of sales and gross profit are shown as a percentage of their corresponding
component of net sales: Three Months Ended March 31 ,2004
    
    2003
    
    Change(Dollars In Thousands)Net Sales:Products
    
    $
    25,085
    
    
    
    79.6
    %
    
    $
    27,190
    
    
    
    79.4
    %
    
    $
    (2,105
    )
    
    
    -7.7
    %Services
    
    
    6,448
    
    
    
    20.4
    %
    
    
    7,036
    
    
    
    20.6
    %
    
    
    (588
    )
    
    
    -8.4
    %Total net sales
    
    
    31,533
    
    
    
    100.0
    %
    
    
    34,226
    
    
    
    100.0
    %
    
    
    (2,693
    )
    
    
    -7.9
    %Cost of sales:Products
    
    
    1,790
    
    
    
    7.1
    %
    
    
    3,169
    
    
    
    11.7
    %
    
    
    (1,379
    )
    
    
    -43.5
    %Services
    
    
    3,746
    
    
    
    58.1
    %
    
    
    3,356
    
    
    
    47.7
    %
    
    
    390
    
    
    
    11.6
    %Total cost of sales
    
    
    5,536
    
    
    
    17.6
    %
    
    
    6,525
    
    
    
    19.1
    %
    
    
    (989
    )
    
    
    -15.2
    %Gross profit:Products
    
    
    23,295
    
    
    
    92.9
    %
    
    
    24,021
    
    
    
    88.3
    %
    
    
    (726
    )
    
    
    -3.0
    %Services
    
    
    2,702
    
    
    
    41.9
    %
    
    
    3,680
    
    
    
    52.3
    %
    
    
    (978
    )
    
    
    -26.6
    %Total gross profit
    
    
    25,997
    
    
    
    82.4
    %
    
    
    27,701
    
    
    
    80.9
    %
    
    
    (1,704
    )
    
    
    -6.2
    %Operating expenses:Product development
    
    
    4,203
    
    
    
    13.3
    %
    
    
    4,463
    
    
    
    13.0
    %
    
    
    (260
    )
    
    
    -5.8
    %Selling and marketing
    
    
    9,350
    
    
    
    29.7
    %
    
    
    8,102
    
    
    
    23.7
    %
    
    
    1,248
    
    
    
    15.4
    %General and administrative
    
    
    3,398
    
    
    
    10.8
    %
    
    
    3,463
    
    
    
    10.1
    %
    
    
    (65
    )
    
    
    -1.9
    %Total operating expenses
    
    
    16,951
    
    
    
    53.8
    %
    
    
    16,028
    
    
    
    46.8
    %
    
    
    923
    
    
    
    5.8
    %Operating income
    
    
    9,046
    
    
    
    28.7
    %
    
    
    11,673
    
    
    
    34.1
    %
    
    
    (2,627
    )
    
    
    -22.5
    %Other income:Interest income
    
    
    311
    
    
    
    1.0
    %
    
    
    555
    
    
    
    1.6
    %
    
    
    (244
    )
    
    
    -44.0
    %Other, net
    
    
    75
    
    
    
    0.2
    %
    
    
    177
    
    
    
    0.5
    %
    
    
    (102
    )
    
    
    -57.6
    %Total other income
    
    
    386
    
    
    
    1.2
    %
    
    
    732
    
    
    
    2.1
    %
    
    
    (346
    )
    
    
    -47.3
    %Income before taxes
    
    
    9,432
    
    
    
    29.9
    %
    
    
    12,405
    
    
    
    36.2
    %
    
    
    (2,973
    )
    
    
    -24.0
    %Income tax provision
    
    
    3,490
    
    
    
    11.1
    %
    
    
    4,745
    
    
    
    13.9
    %
    
    
    (1,255
    )
    
    
    -26.4
    %Net income
    
    $
    5,942
    
    
    
    18.8
    %
    
    $
    7,660
    
    
    
    22.4
    %
    
    $
    (1,718
    )
    
    
    -22.4
    %
 -7-




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Three Months Ended March 31, 2004 and 2003 Net Sales. Our net sales decreased by $2.7 million, or 7.9%, to $31.5
million in the first quarter of 2004 from $34.2 million in the first quarter of
2003. Product sales declined by $2.1 million, or 7.7%, to $25.1 million in the
first quarter of 2004 from $27.2 million in the first quarter of 2003. Lower
product sales were due to the continuing difficult state spending environment
and our customers delaying their purchase decisions to consider the new
Renaissance Placeversions of Accelerated Readerand Accelerated Math,which
are expected to ship during the second quarter. Sales of our six new products,
which were introduced in 2002 or 2003, were improved over the first quarter of
2003 but continued at similar levels to the past couple quarters. Service revenue for the first quarter of 2004 was $6.4 million, a decline
of $588,000 from the first quarter 2003 revenues of $7.0 million. Lower
attendance at the 2004 National Conference resulted in about $700,000 less
revenue in the first quarter of 2004 as compared to 2003. Excluding the
National Conference, we would have achieved modest revenue growth in services
for the quarter, partly due to the delivery of professional development and
implementation services under the district contracts signed in the fourth
quarter. We expect our second quarter sales to be below the second quarter of 2003
but the year over year percentage decline is expected to be improved from the
first quarter decline we experienced. For the full year 2004, we continue to
expect growth in sales and earnings in the low- to mid- single digit percentage
range. These expectations assume modest improvement in the school funding
environment in the second half of the year, improved contributions from our
expanded field sales force, and market acceptance of our Renaissance Place
products and new solution offerings. Cost of Sales. The cost of sales of products decreased by $1.4 million,
or 43.5%, to $1.8 million in the first quarter of 2004 from $3.2 million in the
first quarter of 2003. As a percentage of product sales, the cost of sales of
products decreased to 7.1% in the first quarter of 2004 from 11.7% in the first
quarter of 2003. This decrease is due, in part, to the sales mix this year
compared to last with proportionally lower sales of scanners and custom
assessment products in 2004, both of which are lower gross profit margin
products than our core software products. Lower amortization of capitalized
development costs, and lower scanner warranty and shipping costs, also
contributed to the lower product costs. The cost of sales of services increased by $390,000, or 11.6%, to $3.7
million in the first quarter of 2004 from $3.4 million in the first quarter of
2003. As a percentage of sales of services, the cost of sales of services
increased to 58.1% in the first quarter of 2004 from 47.7% in the first quarter
of 2003. This increase is mainly attributable to lower attendance at our
annual National Renaissance Conference. Since most of the costs to host the
conference are relatively fixed, the lower revenue directly affects
profitability. Cost of sales for support plans and professional development
(excluding the National Renaissance Conference) were similar to the prior year. Product Development. Product development expenses were $4.2 million in
the first quarter of 2004, which was down by $260,000 from $4.5 million the
first quarter of 2003. As a percentage of net sales, product development costs
increased to 13.3% in the first quarter of 2004 from 13.0% in the first quarter
of 2003 primarily due to the decline in sales. We capitalized product
development expenses of $119,000 this quarter compared to $69,000 in the first
quarter of 2003. We expect product development costs to continue in the range
of approximately $4.0 million to $4.5 million per quarter for 2004 and expect
to be toward the lower end of this range for second quarter, as we expect to
capitalize additional costs as Renaissance Placeis completed for Accelerated
Readerand Accelerated Math. Selling and Marketing. Selling and marketing expenses of $9.3 million in
the first quarter of 2004 were up by $1.2 million, or 15.4%, from $8.1 million
in the first quarter of 2003. As a percentage of net sales, selling and
marketing expenses increased to 29.7% in the first quarter of 2004 from 23.7%
in the first quarter of 2003. The increase in selling and marketing expenses is
primarily due to the field sales force expansion with some increase in
marketing costs. The first
quarter is traditionally our heaviest period for advertising in advance of
school purchasing decisions and budgetary allocations for the upcoming school
year. We expect selling and marketing costs to continue to exceed the amount
incurred in the comparable prior year period due to the expansion of our field
sales force.   AR®, Accelerated Math®, Accelerated Reader®, Accelerated Vocabulary®,
Accelerated Writer®, AccelScan®, AccelTest®, Generation21®, MathFacts in a
Flash®, Math Renaissance®, Read Now®, Reading Renaissance®, Renaissance®,
Renaissance Learning®, Renaissance Place®, School Renaissance®,
StandardsMaster®, STAR Early Literacy®, STAR Math®, STAR Reading® Writing
Renaissance® Accelerated Grammar and
Spelling
 -8-




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General and Administrative. General and administrative expenses were $3.4
million for the first quarter of 2004, essentially the same as in the first
quarter of 2003. As a percentage of net sales, general and administrative
expenses increased to 10.8% from 10.1% due to the decline in sales. Operating Income. Operating income was $9.0 million, or 28.7% of net
sales in the first quarter of 2004, compared to $11.7 million, or 34.1% of net
sales in the first quarter of 2003. Income Tax Expense. Income tax expense of $3.5 million was recorded in
the first quarter of 2004 at an effective income tax rate of 37.0% of pre-tax
income, compared to $4.7 million, or 38.3% of pre-tax income in the first
quarter of 2003. We expect to maintain our effective tax rate somewhat below
37.5% for the balance of 2004. Liquidity and Capital Resources As of March 31, 2004, our cash, cash equivalents and investment securities
were $54.0 million, down $57.8 million from the December 31, 2003 total of
$111.8 million. The decrease is primarily due to $8.4 million in net cash
provided by operating activities offset by a special cash dividend of $66.7
million and our first quarterly cash dividend of $1.2 million during the first
quarter of 2004. Even with the payment of cash dividends during the quarter,
we continue to maintain a strong cash position, which we believe, when coupled
with cash flow from operations, will be sufficient to meet both our short-term
and long-term working capital requirements. At March 31, 2004, we had a $15.0 million unsecured revolving line of
credit with a bank that is available until May 31, 2005. The line of credit
bears interest at either a floating rate based on the prime rate less 1.0%, or
a fixed rate for a period of up to 90 days based on LIBOR plus 1.25%. The rate
is at our option and is determined at the time of borrowing. We also have a
$2.0 million unsecured revolving line of credit with a bank available until
April 30, 2005. The line of credit bears interest based on the prime rate less
1.0%. As of March 31, 2004, the lines of credit had not been used. On April 17, 2002, our Board of Directors authorized the repurchase of up
to 5,000,000 shares of our common stock. No time limit was placed on the
duration of the repurchase program, nor is there any dollar limit on the
program. Repurchased shares will become treasury shares and will be used for
stock-based employee benefit plans and for other general corporate purposes.
During the quarter ended March 31, 2004, we did not repurchase any shares under
this program. Depending on our stock valuation, we may repurchase additional
shares as a beneficial use of our cash to enhance shareholder value. The
cumulative shares repurchased under this program remains at 4.0 million with a
cost of $72.9 million. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations As of March 31, 2004, we did not have any off-balance sheet transactions,
arrangements, or obligations (including contingent obligations) that would have
a material effect on our financial results. We enter into operating leases, primarily for facilities that we occupy in
order to carry out our business operations. As of March 31, 2004, there has
been no material change in our operating leases from that disclosed in our 2003
Annual Report. As of March 31, 2004, there has been no change in our long-term debt
obligations, capital-lease obligations or long-term purchase obligations from
that disclosed in our 2003 Annual Report. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments, estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. There have not been any significant changes
to our critical accounting policies that were disclosed in our 2003 Annual
Report. -9-




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Forward-Looking Statements In accordance with the Private Securities Litigation Reform Act of 1995,
we can obtain a safe-harbor for forward-looking statements by identifying
those statements and by accompanying those statements with cautionary
statements which identify factors that could cause actual results to differ
materially from those in the forward-looking statements. Accordingly, the
foregoing Managements Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. Our actual results may differ materially from
those contained in the forward-looking statements herein. Factors which may
cause such a difference to occur include (i) a delay or reduction in school
purchases of our products due to state budgetary constraints resulting in a
reduction in the funds available to schools and (ii) those factors identified
in Item 1, Business, Forward-Looking Statements, contained in our Form 10-K for
the year ended December 31, 2003, which factors are incorporated herein by
reference to such Form 10-K. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. Our exposure to market interest rate risk consists
of: (i) the increase or decrease in the amount of interest income we can earn
on our investment portfolio, and (ii) the decrease or increase in value of our
investment security portfolio if market interest rates increase or decrease,
respectively. We anticipate that we will have sufficient liquidity to hold our
investments to maturity, therefore, we do not expect to recognize any material
losses or gains related to an increase or decrease in market interest rates. Market Risk.Our exposure to market risk relates to the quality of the
holdings in our investment security portfolio. The fair market value of our
investments is subject to increases or decreases in value resulting from the
performance of the securities issuer, from upgrades or downgrades in the credit
worthiness of the securities issuer, and from changes in general market
conditions. We seek to manage our exposure to market risk by investing
according to our board-approved investment policy which has the following
goals: (i) preservation of capital, (ii) provision of adequate liquidity to
meet projected cash requirements, (iii) minimization of risk of principal loss
through diversified short and medium term investments, and (iv) maximization of
yields in relationship to the guidelines, risk, market conditions and tax
considerations. Our investment policy specifically requires: (i) that each investment have
a maximum maturity of 36 months, (ii) that at least 10% of the portfolio be
available on 30 days notice and not more than 30% of the portfolio have a
maturity in excess of 24 months, (iii) that each investment meet minimum credit
quality requirements, (iv) that our portfolio be diversified such that not more
than 10% is invested in any one issuer (other than the US Treasury or its
agencies, or money market funds), and (v) that each investment meet certain
maximum maturity or tender option limits based on its minimum credit rating.
As of March 31, 2004 our investment securities had a market value of
approximately $40.8 million and a carrying value of $40.6 million. Our investment policy parameters preclude investment in equity securities
and require that the Board of Directors review the policy annually and on an
interim basis as required. Foreign Currency Exchange Rate Risk.The financial position and results
of operations of our foreign subsidiaries are measured using local currency.
Revenues and expenses of such subsidiaries have been translated into U.S.
dollars at average exchange rates prevailing during the period. Assets and
liabilities have been translated at the rates of exchange at the balance sheet
date. Translation gains or losses are deferred as a separate component of
shareholders equity. Aggregate foreign currency transaction gains and losses
are included in determining net income. As such, our operating results are
affected by fluctuations in the value of the U.S. dollar compared to the
Australian dollar, British pound, Canadian dollar, and Indian Rupee. At this
time, foreign exchange rate risk is not significant due to the relative size of
our foreign operations. -10-




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Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the companys disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control procedures and management
was necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. As of March 31, 2004, an evaluation was performed under the supervision
and with the participation of management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. There has been no change in our internal
control over financial reporting that has occurred during the quarter ended
March 31, 2004 that has materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting. -11-




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Part II  OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Common Stock. On April 17, 2002, our Board of Directors authorized a
repurchase program which provides for the repurchase of up to 5,000,000 shares
of our common stock. No time limit was placed on the duration of the
repurchase program, nor is there any dollar limit on the program. Repurchased
shares will become treasury shares and will be used for stock-based employee
benefit plans and for other general corporate purposes. The following table shows information relating to the repurchase of shares of
our common stock during the three months ended March 31, 2004: Total Number of
    
    MaximumShares Purchased
    
    Number of Sharesas Part of
    
    that May yet beTotal Number
    
    Average Price
    
    Publicly
    
    Purchased Underof Shares
    
    Paid per
    
    Announced Plans
    
    the Plans orPeriod
    
    Purchased
    
    Share
    
    or Programs
    
    ProgramsJanuary
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    977,758February
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    977,758March
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    977,758Total
    
    
    0
    
    
    $
    0
    
    
    
    0
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit No.
    

Description31.1
    
    
    Section 302 certification by John R. Hickey31.2
    
    
    Section 302 certification by Steven A. Schmidt32.1
    
    
    Section 906 certification by John R. Hickey32.2
    
    
    Section 906 certification by Steven A. Schmidt
 (b) Forms 8-K. The following Form 8-K filings were made during the three
months ended March 31, 2004:  1.
    
    Form 8-K dated February 11, 2004 (filed on February 12, 2004).Press release announcing the appointment of Judith H. Ryan, Ph.D., as a
director of the Company. -12-




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. RENAISSANCE LEARNING, INC.(Registrant)May 5, 2004
    
    
    
    /s/ John R. HickeyDate
    
    
    
    John R. HickeyPresident and Chief Executive Officer(Principal Executive Officer)May 5, 2004
    
    
    
    /s/ Steven A. SchmidtDate
    
    
    
    Steven A. SchmidtExecutive Vice President, and Chief Financial Officer(Principal Financial and Accounting Officer)
 -13-




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Index to Exhibits Exhibit No.
    

Description31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Steven A. Schmidt32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Steven A. Schmidt
 -14-